Power play

Editor's note: Keith Baugh is senior analyst, market research, with Public Service Company of Colorado. Brian Byrnes is president, and Clive Jones is senior associate, at Insight Research, Boulder, Colo.

Consumer product manufacturers have a keen desire to know whether consumer attitudes about the environment translate into consumer action. The question is so intriguing that the term "green marketing" has become part of the industry vernacular. The answer is important to electric utilities, and it became extremely significant to Public Service Co. of Colorado when the company faced a resource planning docket that included a renewable energy component.

PSCo is Colorado's largest electric utility, serving about 80 percent of the state's population and 20 percent of the state's geography. The system has just over a million meters and has been growing at a rate of about 1.2 percent a year.

The company wanted to resolve contradicting opinions among customer and special interest groups about the necessity and cost of renewables. In researching renewable resource issues, PSCo has answered a number of questions for the electric utility industry. And by heeding the advice offered by its customers, PSCo was able to develop a strategy for introducing renewable energy that promises to meet the needs of regulators, shareholders and customers alike.

To navigate its way through largely uncharted waters, PSCo's marketing division first recapped past research about consumers' environmental attitudes, then conducted what may be the nation's most comprehensive utility-sponsored study of so-called green pricing. The study, which was completed in December 1992, produced reliable pricing estimates and market-penetration projections of customers' willingness to voluntarily fund accelerated development of renewable resources.

Customers can now consider PSCo's proposal for a small-scale renewable energy program that would be funded through voluntary contributions - one that can be enacted without an overall rate increase. This unhurried, grassroots approach has the potential to make renewable energy a legitimate option in the minds of increasing numbers of customers, and the process has established a solid foundation for the expansion of renewable energy's role in PSCo's production mix. What's more, segmentation analysis of survey responses has given PSCo the ability to market renewable energy to those customers who most strongly support emerging technologies. All of this was achieved simply because the company was willing to listen.

Historical perspective

Colorado's growing commitment to demand-side management, abundant natural gas and coal and a wealth of available knowledge about mining and the environment have provided PSCo with flexibility in designing energy programs to meet customer needs. PSCo's supply of clean, well-priced coal and inexpensive purchased power has resulted in some resistance to independent and renewable resources. Some believe renewables will raise the relatively low energy costs enjoyed by PSCo customers.
With the resource docket approaching, three PSCo vice presidents - James H. Ranniger of rates and regulations, Earl E. McLaughlin Jr. of marketing, customer services and support services, and William J. Martin of electric engineering and planning - requested the recap of environmental research. Coincidentally, PSCo's market research unit, along with Insight Research Inc., Boulder, Colo., had just completed a successful experimental study that estimated consumer willingness to pay for the environmental benefits of demand-side management.

These estimates were made using an econometric modeling method known as contingent valuation, a research tool originally developed to assess the economic value of air quality and other public environmental issues. As a result of their demand-side study, PSCo researchers knew they could use the same technique to describe customer willingness to pay for renewable energy programs. This was exactly what PSCo executives wanted, so the market research unit launched a comprehensive contingent valuation analysis of customer support for renewable energy in Colorado.

Renewables accelerate

David Moskovitz, one of the originators of the green pricing concept, has described green pricing as "an optional electric service being offered to customers who want to increase their utility's reliance on renewable resources over and above what would occur with least-cost planning." Since renewable energy is currently more expensive to produce, customers who choose this service option pay a premium rate - the program can get complicated when it comes time to determine how much the premium should be and how much renewable energy it finances.

PSCo's preliminary research showed that while some specific market research had been done, many utility pricing estimates and projections of customer participation in green pricing programs have relied on information drawn from consumer product research: studies dealing with recycled paper products, environmentally safe trash bags, hair sprays, and the like, or studies of environmental issues that didn't explore the issues as they related to utilities.

Both consumer product research and environmental research consistently suggest that between 40 percent and 70 percent of the population is willing to pay premiums of 6 percent to 10 percent for products they believe are manufactured using environmentally friendly methods and resources. Revenue estimates for many utility green pricing efforts appear to have used similar general data without validation specific to a utility.

The greening of an industry

Early attempts by some utilities to fund renewables using green pricing have encountered difficulties. Among other things, the collaborative process among environmental and public interest groups and the utilities has slowed not only the implementation but even the design of green pricing programs.

Given that the available information was based on consumer product research, "We thought it wise to learn directly from our customers if and how they wanted us to go about developing this resource," says Rodney McLenon, PSCo's manager of market analysis. "From what we could see in other green pricing efforts, limited customer input had been used in program design, especially when it came to pricing and program sizing.

"We chose to allow program design to be driven by customer input. Our research is far more extensive than anything we were able to document in discussions with other utilities. The need to involve public interest groups in the design of programs may eventually stall our process as well, but for the time being we believe we have accurately represented the public's interests in the program we have developed."
In essence, PSCo has redefined the ground rules for designing renewable energy programs by asking customers, through research, what their preferences are for these technologies.

Insight Research Inc. helped PSCo get an accurate representation of its customers' wishes. Insight Research's familiarity with contingent valuation, coupled with its solid understanding of PSCo's customers, resulted in a valid custom design for the research.

Many market analysts agree that even in consumer product research, substantial discrepancies exist between consumers' stated interest in environmentally friendly products and their ultimate behavior with regard to them. It was obvious that PSCo's customer-driven renewables research would have to tackle a problem that has plagued researchers for years: the process of predicting what people do based on research that shows what they say they will do.

In an article titled "Using Segmentation to Improve Sales Forecasts Based on Purchase Intent: Which 'Intenders' Actually Buy?" in the November 1992 Journal of Marketing Research, Vicki G. Morwitz and David Schmittlein succinctly outline crucial questions in intentions research that often go unanswered in predicting behavior:

  • How accurate is a respondent's stated intent to purchase at some point in the future?
  • What questions will best measure intent?
  • Do all individuals convert intent to behavior in the same way?
  • What factors affect the conversion of stated intent to behavior?

Research explores the unknown

PSCo wanted answers to many of the pricing questions Morwitz and Schmittlein posed. PSCo also wanted to predict how many of their customers would actually volunteer to pay for the accelerated development of renewable energy, not merely measure customer interest. After reviewing industry information on consumer opinions regarding renewable energy, the environment, natural resources, and green markets in general, PSCo accumulated a substantial list of unanswered questions specific to utility green pricing programs:

  • Are Colorado electric customers willing to pay for emerging renewable technologies, and if so, how much are they willing to pay?
  • What is the expected voluntary participation at different price levels?
  • Should all customers pay for emerging renewable technologies?
  • Are there "free rider" concerns with the program?
  • Is green pricing the best "market pull" approach?
  • Should rate premiums be flat amounts or a percentage of the customer's bill?
  • Does green pricing, as proposed, overload an already burdened Public Utilities Commission policy system?
  • What mix of renewable technologies is best from the customer's perspective?
  • What kind of commitment periods should be required for program participation?
  • What is the best name for a voluntary renewable energy program?

To answer these and the many other questions posed prior to study design, it was obvious an exhaustive process would be required.

The best way to answer pricing questions was through a simulated test market. At the same time, a carefully designed set of attitude questions was used to provide more insight on the reasons customers behave the way they do. More specifically, research design focused on detailed descriptions of renewable energy program scenarios to be used in the contingent valuation modeling process. Each of these scenarios was carefully structured using input taken from customer focus groups.

The research design used by PSCo and Insight Research analysts broke new ground in the use of contingent valuation and market simulation to establish accurate estimates of customer willingness to pay for renewable programs. But PSCo and Insight Research also wanted to explore new methods of relating expressed customer interest to actual behavior. Consequently, the research became a vehicle for not only answering questions about green pricing but also redefining elements of the contingent valuation process itself.

After extensive secondary research and consultation with utilities that had already conducted research about green pricing, PSCo began its primary research process by designing focus groups to explore customer perceptions of and interest in renewable energy, and methods customers might find appealing for funding these resources. PSCo learned from these groups that its customers have strong feelings about the environment and the nation's natural resources. Focus group results also helped outline a number of features customers would be most comfortable with in actual program design. Many of these were tested during telephone interviews with a representative sample of residential customers.

It was obvious that customers wanted renewable energy resource development. On the other hand, customers indicated that they would not voluntarily fund elaborate, experimental approaches to developing renewable resources. Focus group participants quickly became frustrated with complex pricing schemes and methods for determining the amount of future renewable production. "Keep it simple" was the common customer suggestion.

During the focus group process, customers showed dislike for the term green pricing. They believed the name aligned renewable energy - which they considered a respectable power option - too closely with less reputable consumer product green marketing programs. Following this revelation, PSCo executives directed the company's communications and marketing staff to develop a new name for green pricing at PSCo. The name ECO-Option was coined, then discarded in favor of Voluntary Renewable Energy Program. The company envisioned customers playing a role in the final selection of a name for the program.

Focus groups were used to test several contingent valuation scenarios designed to refine not only the basis of the research, but such mundane elements as wording and terminology as well. For example, customers seemed to understand "pounds" of particulates more easily than "tons" of particulates, and they wanted to know exactly how many customers 10 megawatts of energy would serve. Results from contingent valuation focus group concept tests resulted in more understandable scenarios for the actual telephone interviews.

Contingent valuation

PSCo chose contingent valuation as the analytic method for determining voluntary renewable program revenues. The design of any contingent valuation process is crucial. Precise specifications must be followed to assure the accuracy of the model. But the company made the choice after reviewing past efforts that demonstrated contingent valuation's appropriateness (as opposed to other statistical procedures such as choice modeling and conjoint analysis) for use in regulatory proceedings. Insight Research had demonstrated how contingent valuation results are accepted by regulatory and environmental economists. Contingent valuation seems to enjoy great respect as a resource in litigation and environmental research, and though it remains somewhat new to the utility industry, it is being used to value quasi-public services such as energy programs that have environmental significance.

"Contingent valuation represents a new way to share information between the utility, its customers, and regulatory commissions about the value of programs having environmental implications," says Renee de Alba, vice president with Insight Research.

The contingent valuation method provides a direct estimate of how much customers are willing to pay for environmental and resource conservation benefits. Recent computational breakthroughs, such as neural networks, have made estimates of customer willingness to pay much more accessible. In essence, the technique has come of age.

All survey and polling methods are susceptible to potential discrepancies between customers' good intentions and their actual behavior. Many utilities can remember environmental or energy conservation programs that received high marks from customers during market research, but were less than successful when introduced into the marketplace.

No matter how positive customers' feelings about renewable energy are, PSCo needed to predict customer participation at specified pricing levels before seriously considering introducing a voluntary renewable program to the public. Accordingly, a simulated test market component was designed into the research. Survey respondents were offered the opportunity to return a registration card committing them to an agreed-on amount to be added to their monthly electric bill when the voluntary renewable program was formally introduced. To increase PSCo's understanding of customer motivations, random interviews with those who did not return registration cards were conducted. The interviews explored reasons those customers had chosen not to participate.

Research results

Customer support for the voluntary renewable program scenarios was quite high when survey respondents were presented with monthly rate premiums of between $1 and $4 (about 2 percent to 8 percent of the average monthly PSCo residential electric bill). Almost 82 percent of those surveyed reported they would be willing to pay this initial amount to voluntarily support of development of renewable energy. About 75 percent of the study participants said they would like to receive additional information and a program registration card.

Other green pricing programs and other industries' environment-friendly products have garnered similar levels of declared interest. The interest expressed in the voluntary renewable program also parallels a 1992 review of public perceptions and preferences on energy policy. The review, published by the National Renewable Energy Laboratory, highlighted studies in which 78 percent of survey respondents expressed an interest in paying more than $6 per month to receive electricity from sources less harmful to the environment.

Insight Research's tally of the results of the returned registration cards required a dramatic and fundamental shift in projected customer participation in a voluntary renewable program. While 75 percent of survey respondents requested registration cards, with an approximate $2 per month pledge, only 10 percent of survey respondents took the next step, signing and returning the self-addressed, stamped registration to PSCo. Based on returned registrations, the contingent valuation model estimated an average per customer participation of slightly less than $2 per month, or approximately 5 percent of an average customer's monthly electric bill.

Insight Research contacted those who had not returned a registration card and asked if there was any particular reason for their hesitation. The overwhelming response was that no problem existed other than remembering to return the card. The customers were then given additional time to return the card, and most indicated they would. Yet few did, emphasizing this group's inability to follow through on their commitment, whatever the reason.

This recognized shift in customer behavior has allowed PSCo to accurately estimate initial program pledges and participation, rather than accepting market penetration (40 percent to 70 percent) and pricing premiums (6 percent to 10 percent) based on previous consumer product and environmental research. In a nutshell, PSCo's research was designed to validate or deny these generally accepted estimates of participation and pricing. The value of these results is that PSCo's program, which is designed to seek voluntary financial assistance for the development of renewable energy, will be viewed positively by over 80 percent of all residential customers, regardless of actual participation. This is an enviable position for any new utility program.

Bonus benefits

PSCo will also be able to use customer information from its analysis in the design of a communications plan for the voluntary renewable program. Issues of primary importance to customers can be addressed as PSCo's entry into renewable energy evolves. Segmentation results reveal clear differences in customer attitudes about the environment, renewable energy and conservation programs. Three distinct market segments, based on these measures of attitude, showed large differences in customer willingness to financially support the voluntary renewable program. To more effectively market the program, PSCo will use information from the segmentation analysis to target communications to those customers already inclined to support the voluntary renewable program.

Customer preferences for a number of renewable technologies were also measured. Interest in retrofit hydro-electric projects was strong, but support for new dam construction was weak. Photovoltaic solar and wind technology projects were also well accepted. When asked in telephone interviews if they would like to see PSCo develop the renewable source they selected as their primary preference, or if they would rather PSCo be the one to choose a mix of renewables for development, customers supported, at a rate of nearly 3-to-1, the idea of PSCo determining a power mix of renewable resources.

Survey respondents were also sensitive to PSCo's need to profit from activities it might undertake. Focus groups told researchers they understood that PSCo had to earn a profit from renewable programs, especially to get the ball rolling. A strong majority of customers interviewed by phone agreed that it would be appropriate for the utility to profit from the voluntary renewable programs described in the research.
The focus group findings also revealed that customers believe it would be better for PSCo to develop renewable resources than to have government agencies involved. When asked about this in telephone interviews, more than half of those surveyed strongly agreed that these programs would be better developed by PSCo than by the state or federal government.

A program evolves

Details of this comprehensive research process have allowed PSCo officials to answer many of their questions about program penetration and pricing. The same details have been used to design communications and an implementation strategy for renewable energy at PSCo.

One research finding that interested PSCo executives was the unsolicited input from customers requesting a customer board of some kind to provide direction to PSCo regarding the development of renewable resources. Participants in the research indicated that if residential customers were volunteering funds, they should have a say in how those funds were spent. PSCo officials agreed.

It was decided the Renewable Energy Customer Advisory Panel, a randomly selected group of residential customers, could be the key to creating and maintaining customer interest and involvement in the program well into the future. CAP members will be educated in the workings of an electric utility, in the costs and benefits of renewable resources, and in the many facets of the decision-making process regarding the growth of renewable energy in supplying PSCo electric customers. The CAP will offer direction to PSCo officials regarding future renewable energy opportunities at PSCo that fall within the budget established through the Voluntary Renewable Energy Program.

Another primary role for the CAP will be to provide insight into how best to encourage voluntary funding of renewable energy by Colorado residents through the limited promotional efforts prescribed for the program. Focus group participants were not interested in glossy brochures and promotions. Instead, they insisted on accurate, factual information about PSCo's efforts to develop renewable energy resources. Given this conservative approach to advertising and the media, the CAP will be called upon to creatively expand customer involvement in the Voluntary Renewable Energy Program as it matures.

Contingent valuation modeling combined with conventional segmentation procedures and market simulation have instilled confidence that research predictions of customer participation in such a voluntary renewable program are accurate. "The key is to implement programs based on market research results," says McLaughlin, PSCo's vice president of marketing, customer services and support services. "The program concepts that were tested came from the customers themselves. They are prudent and pragmatic, and it would be to our advantage to implement based on those findings. If we choose to alter the design of our renewable program and still want accurate penetration estimates, we should perform additional research to measure consumer response to those changes. Market Research has provided a roll-out plan for renewables that is customer driven. We need to listen long and hard to that input before we proceed."

"Many in our industry seem to be going in the same direction," PSCo's McLenon says. "From our observations, no one had specifically defined how the customer wanted us to go about introducing renewable energy. Our research has provided that added component, and aids us in designing truly customer-driven programs."